The impact of employee share plans on productivity

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The impact of employee share plans on productivity

• Damian Carnell
• GEO Conference - Netherlands
• 22/23 April 2001
• Towers Perrin

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Agenda

• 1 The aims
• 2 The types of plan
• 3 Costing/NPV analysis
• 4 Academic and survey support
• 5 Optimising the result
• 6 The future

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Aims

• An Informed Board Decision
• An Effective Share Plan
• Multiple Intangible Benefits
• Enhanced Shareholder Value

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(No Transcript)
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Share Plan Effects
Communication
Culture
Compensation
Motivation
Opportunity
Ability
Performance
Shareholder Value
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• FOCUS
• Growth focus free ride safe
• Forced shareholding free ride safe
• Expensive
• Encouraged shareholding commitment risk
• Informed/easy investment choice commitment
  risk

• TYPE
• Options
• Free shares
• Share match/
• Discounted Purchases
• Share Purchase

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Building the business case

• Objectives
• Design
• Costs
• Alignment with business and reward strategies
• Employee Research
• Academic Research
• Implementation
• communications
• administration
• timing

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Broad Approach
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Objectives

• Examples
• replacement for obsolete/ineffective programs
• attraction and retention
• alter competitive positioning of benefits
• pay for performance (individual, team, business)
• encourage share ownership/improve line-of-sight
• benefit diversification
• improve tax effectiveness of benefit spend for
  employees
• equality

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Costing/NPV Analysis

• Valid to make cost clear
• New issue of shares - assess on a B/S basis
• Sensitivity analysis
• NPV negative - as no benefits factored in, but
  helps funding/share choice
• Benefits fall outside cost/NPV analysis and must
  be assessed separately

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Benefit Costs

• For a given design, may vary according to
  participation rates
• - contribution levels
• - performance
• - timing of share purchase
• Essential to understand potential variation in
  costs
• - projections under various scenarios
• - provide information on potential range as well
  as expected costs

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Benefit costs

• Design and cost analysis go hand-in-hand
• a variety of design structures may be provided
  for a given cost
• results of cost projections may impact on design

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Alignment Business
Performance Framework
Employer perspectiveIncreasing shareholder value
Employee perspectiveMeaningful, rewarding work
People strategies and the deal
Peoplestrategies and the deal
Staffing and selection strategy
Change management and communication strategy
Total rewards strategy
Pay
Benefits
Externalinfluences
Internalinfluences
Learning and Development
Work Environment
Aligned employee behaviours that yield improved
business results
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Academic Evidence

• Almost all positive
• Various methodologies/performance indicators
• Mainly Anglo-Saxon
• Recent studies available...

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Benefits Studies to 1990
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Benefits Studies to 1995
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Benefits Studies to 1998
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Evidence Round-up

• Proshare 1998
• - explored how share ownership impacts
• employee motivation attitude (300 interviewed)
• - 66 employees check the share price once a week
  or more
• - employees owning shares report
• gain from success 73
• aware of companys aims 55
• less willing to leave 43
• more involved 41
• improved job performance 32

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Evidence Round-up

• Mehran/Hewitt 1999
• - 382 publicly traded ESOP companies
• - TSR up 12 compared to peer group
• - ROA up 2.7 by contrast to control group
  (I.e.
• 14 for 303 4-year survivors, but 6.9
  overall)
• - 230 companies reporting on ownership culture
• 82 of executives reported better corporate
• performance
• 18 of executives reported better employee
• behaviours
• 85 of companies improved information
• access

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Evidence Round-up

• Towers Perrin benefit index 1999
• - 13,000 managers and employees of larger UK
  firms
• - 86 of managers and 66 employees believe
  that
• when employees own shares, they are more
  committed
• to success
• - encouraging ownership of success is the second
  most
• important people issue - after raising
  productivity
• - aside from pensions, employee share schemes
  are the
• area managers least want spending to be cut

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Evidence Round-up

• Sofres 2000
• - 201 financial analysts in five European
  countries
• interviewed
• - 33.3 overall (higher in UK and Netherlands)
  are likely
• to recommend ESOP companies as investments
• seen as increasing worker motivation
  loyalty
• - highlighted different perspectives across
  Europe
• F, D B - improved social cohesion
• UK NL - improved economic performance

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Evidence Round-up

• Conyon Freeman 2000 299 LSE listed companies
• - companies with share ownership/profit sharing
  schemes more
• likely to engage in consultation
  communication with employees
• - productivity improved after introduction of
  scheme
• approved profit sharing 17
• share option plans 12
• approved profit-related pay 4
• approved SAYE -3
• - survey of 1,800 companies productivity
  financial performance
• are positively related to number of
  systems linking business
• performance to modes of compensation

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Optimising the Result

• Improved compensation
• Align employee behaviour with company values
• Attract and retain talent in a competitive market
• Be seen as a good employer
• Help to change the culture of the company
• Tax efficiency
• What is your main focus?

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Cost-effectiveness

• Focus on the level of investment in the share
  plan and the
• corresponding outcome effectiveness
• Input
• Cost of the plan
• Outcomes
• Improved perception of compensation
• Higher levels of engagement
• Better attraction and retention
• Changed culture
• Enhanced shareholder value
• You need to decide the relative importance of
  each outcome

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The Success of share plans can be Measured in
these Five Key Areas
Attraction and Retention
Shareholder Value
Culture
Compensation
Engagement

• Turnover
• Staffing efficiencies
• Critical skill indices
• Retention indices
• Employer of choice

• Perceived value of share plans

• Analyst perceptions
• Shareholder value
• Return on human capital

• Respect Recognition
• Values Leadership behavior
• Learning, Development, Growth
• Improved quality and speed of decision making
• Innovation

• Employee commitment, and workplace perceptions
  Improved operational measures

ILLUSRTRATIVE
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The Measurement Process

• Two stages
• design of an optimally effective share plan
• tracking its effectiveness

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Benefits of pre-launch
measurement

• Pre-launch measurement and analysis provides a
  business case for the plan
• accurate estimate of employee uptake of the
  scheme provides an
• accurate costing for the scheme
• perceptions of the scheme by different employee
  groups indicate
• whether a one scheme fits all approach is
  sensible
• employee perceptions of the value of the scheme
  relative to other
• aspects of their remuneration package
  indicates whether the money
• will be well spent on the scheme
• uptake estimates and retention estimates
  together provide an optimal
• scheme investment amount this gives a
  target level for the scheme
• at launch or in future
• and also provides
• a baseline measures of engagement and culture
  show where gaps
• between existing and desired states exist
  and indicate where
• communications should be focused

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Benefits of Measurement After
Implementation of the Plan

• The post launch measures provide a balanced
  scorecard of outcomes that enables management to
• know whether initial employee expectations of
  the plan have
• been met
• quantify in terms the effect on attraction and
  retention
• know whether engagement has increased as a
  result of the
• plan
• know whether targeted culture changes have
  occurred
• quantify in terms changes in shareholder
  value
• know whether understanding and administration
  of the share
• plan is satisfactory or if further effort is
  required
• know if special attention is needed for
  specific employee
• groups

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The Future

• Equity Pay will grow - a function of
• - the new economy
• - new ways of working
• - retreat of paternalism
• in consequence, money dedicated to plans will
  increase overtime, perhaps dramatically
• because of heavier weight of money and because of
  its role in creating competitive advantage, the
  rigour with which proposals are tested will rise
• old basis for plan approval will change - there
  will be more reliance on measurement, academic
  input and cost/benefit analysis